There Are Reasons To Feel Uneasy About Bortex Global's (HKG:8118) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Looking at Bortex Global (HKG:8118), it does have a high ROCE right now, but lets see how returns are trending.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Bortex Global:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.22 = HK$40m ÷ (HK$216m - HK$36m) (Based on the trailing twelve months to January 2021).

Therefore, Bortex Global has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 8.2% earned by companies in a similar industry.

See our latest analysis for Bortex Global

Historical performance is a great place to start when researching a stock so above you can see the gauge for Bortex Global's ROCE against it's prior returns. If you're interested in investigating Bortex Global's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Bortex Global's ROCE Trend?

In terms of Bortex Global's historical ROCE movements, the trend isn't fantastic. Historically returns on capital were even higher at 57%, but they have dropped over the last five years. However it looks like Bortex Global might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Bortex Global has decreased its current liabilities to 16% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

To conclude, we've found that Bortex Global is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 55% over the last three years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you'd like to know about the risks facing Bortex Global, we've discovered 1 warning sign that you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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